In its April 5, 2018 decision in Reif v. Nagy (Index No. 161799/15), the Commercial Division of New York State Supreme Court ordered two pieces of alleged Nazi-looted art turned over to relatives of their original Jewish owner, Fritz Grunbaum.[1] In a surprise ruling, the Court’s holding came in direct opposition to that reached by the Southern District of New York in a 2011 decision (affirmed by the Second Circuit in 2012) concerning essentially the same facts in Bakalar v. Vavra (“Bakalar”).[2] Defendants have indicated that they will appeal the state court’s decision, which could have a dramatic impact on restitution claims by other victims of Nazi persecution.[3]

The Grunbaum Art Collection

Fritz Grunbaum was a prominent cabaret performer in 1930s Vienna and an avid collector of art. His collection contained numerous works by Egon Schiele, including the two works at issue here, Woman in a Black Pinafore and Woman Hiding Her Face. In 1938, after Grunbaum had been arrested and imprisoned in a Nazi concentration camp following the German absorption of Austria, the Nazi forces ordered Jewish citizens to turn over all assets worth over 5,000 Reichmarks. The Third Reich inventoried and catalogued Grunbaum’s art collection, then forced Grunbaum to sign a power of attorney granting his wife, Elisabeth Grunbaum, control over his assets. Grunbaum died in 1941 at Dachau; Elisabeth also died at a concentration camp one or two years later. At some point – exactly when or how is unclear from the historical evidence – Elisabeth’s sister, Mathilde Lukacs, obtained possession of Grunbaum’s collection; in 1956, she sold the paintings to the Kornfeld Gallery in Bern, Switzerland, maintaining at that time that she owned them. Thereafter, the paintings changed hands several times through private sales. Ultimately, defendant and art dealer Richard Nagy purchased Woman Hiding Her Face (1912) and a half-interest in Woman in a Black Pinafore (1911).

The State Court Litigation

In 2015, plaintiffs Milos Vavra, Timothy Reif and David Frankel (“Plaintiffs”) – remote relatives and statutory heirs to the Grunbaum estate – filed suit against Nagy and his private company, Richard Nagy Limited (“Defendants”), after Nagy publicly exhibited the two Schiele works at issue at the Salon Art + Design show in New York. Plaintiffs asserted claims of conversion, replevin and violation of New York General Business Law § 349, and subsequently moved for summary judgment. Plaintiffs argued that Grunbaum’s ownership of the works before World War II was undisputed, and that because Defendants could not establish that the initial transfer from Grunbaum to his wife had been voluntary, all subsequent transfers of the paintings were void.[4]

Cross-moving for summary judgment, Defendants contended that Plaintiffs had not met the burden of proof on their claims because the only purported evidence of Grunbaum’s ownership of the works – a catalogue from 1956 – was inconclusive, and that “it is the identity of the person who sold the artworks [to Kornfeld], then, that becomes the key issue.”[5] Defendants maintained that they had established that Grunbaum’s sister-in-law possessed the artworks after the war and sold them to Kornfeld, and that “[t]he most reasonable inference to draw from these facts is that the [artworks] remained in the Grunbaum family’s possession and [were] never appropriated by the Nazis.”[6] Defendants also claimed that Plaintiffs’ claims are barred by laches, because Plaintiffs failed to diligently pursue their claims “despite knowledge of Grunbaum, his art collection, and Mathilde Lukacs.”[7]

New York State Supreme Court Justice Charles A. Ramos granted summary judgment to Plaintiffs. He held that, because Grunbaum’s initial transfer of the artworks to his wife had been pursuant to a power of attorney obtained via coercion, the transfer was not voluntary and thus was tantamount to theft.[8] Explaining that, “[i]n New York, a thief cannot pass good title,” he concluded that no subsequent transfer of title in the works was valid.[9] Accepting Plaintiffs’ evidence “that the artworks were the property of Mr. Grunbaum, and that the entirety of Mr. Grunbaum’s property was looted by the Nazis during World War II,” Justice Ramos found that Plaintiffs had carried their burden of making “a threshold showing that they have an arguable claim of a superior right of possession to the artworks.”[10] As a consequence, the burden shifted to Defendants to present evidence or raise a triable issue of fact to show that Mr. Grunbaum had voluntarily transferred the artworks during his life. Finding that “[D]efendants have not shown that Mr. Grunbaum ever voluntarily transferred the artworks to Ms. Lukacs,” Justice Ramos concluded that valid title never passed from Mr. Grunbaum.[11]

Bakalar and the HEAR Act

Justice Ramos’s ruling is particularly unexpected in light of the contrary ruling in Bakalar, in which the same plaintiffs brought similar claims in connection with another Schiele painting from the same Grunbaum collection. There, Judge Pauley of the Southern District of New York found that a preponderance of the evidence established that the painting at issue “was not looted by the Nazis.”[12] The Bakalar court found the fact that Grunbaum’s collection remained in the possession of his extended family after the war inconsistent with the Bakalar plaintiffs’ claim that the Nazis had looted those works. “While an inventory may have been a preliminary step in the looting of Jewish property,” Judge Pauley reasoned, “it is not proof that the [artwork] was seized”; rather, “Lukacs’ possession of the [artwork] after World War II strongly indicates that such a seizure never occurred.”[13] Judge Pauley found this inconsistency a sufficient basis for rejection of the very argument credited by Justice Ramos: that Grunbaum’s transfer of his collection to his wife was void because the power of attorney he executed was the product of duress.[14] Although Judge Pauley went on to find that, because “there is simply no evidence as to how Lukacs acquired the [artwork],” the Bakalar defendants failed to establish that Lukacs had good title to the Schiele work when she sold it to Kornfield, he ultimately held the Bakalar plaintiffs’ claims barred by laches as a result of their “lack of due diligence in attempting to locate the property.”[15] A unanimous panel of the Second Circuit affirmed Judge Pauley’s judgment for the Bakalar defendants.[16]

When the same plaintiffs filed suit again in New York State court in 2015, this time against Nagy, many in the legal community assumed that Justice Ramos would issue a similar ruling. So what changed between Bakalar in 2011-12 and Nagy in 2018?

The key intervening event was passage of the Federal Holocaust Expropriated Art Recover Act, or “HEAR Act,” in 2016.[17] As Justice Ramos notes, Congress enacted the HEAR Act with the “twin purposes” of (i) “ensuring that laws governing claims to Nazi-confiscated art and other property further United States policy” and (ii) “ensuring that claims to artworks and other property stolen or misappropriated by the Nazis are not unfairly barred by statutes of limitations but are resolved in a just and fair manner.”[18] While the HEAR Act by its express terms only acts to defeat provisions of law and defenses at law “relating to the passage of time,” Justice Ramos used the Act’s passage as a blunt instrument to invalidate any precedential value of Bakalar: “The [HEAR Act] was only made into law in 2016. To the extent that [D]efendants rely on judicial findings relating to claims or defenses articulated in [Bakalar], such discussion is irrelevant.”[19]

Then, underscoring that the HEAR Act had “instructed [us] to be mindful of the difficulty of tracing artwork provenance due to the atrocities of the Holocaust era,” Justice Ramos essentially set aside the unknowns of (i) exactly how Lukacs came to possess the Grunbaum collection and (ii) whether the Nazis ever actually took possession of the collection themselves, and instead focused exclusively on the involuntary nature of Grunbaum’s initial transfer to his wife.[20} Apparently equating this involuntariness with dispositive proof that the transferred artworks constituted “Nazi-looted art,” Justice Ramos concluded that the HEAR Act applied to the dispute.[21] He then ruled that the HEAR Act operated to defeat the defense of laches – without any discussion of Nagy’s argument to the contrary.[22]

Questions Going Forward

If Defendants go forward with an appeal, the Appellate Division will likely have at least two significant questions to review. First, what constitutes Nazi-related
confiscat[ion],” theft, “missappropriat[ion]” or “loss” sufficient to bring a dispute within the ambit of the HEAR Act?[23] Is evidence of Nazi persecution leading to a transfer between family members (neither of whom was aligned with the Nazis) sufficient, or must there be a showing that the Nazis or their collaborators themselves ever took possession of the property in question? Second, does the HEAR Act’s bar of “any defense at law relating to the passage of time” operate to defeat the defense of laches — usually characterized as an equitable defense?[24] The implications of the appeal are far-reaching, as an affirmation would likely pave the way for additional litigation arising from similar fact patterns, where uncertainties or gaps in wartime provenance might otherwise have prevented plaintiffs from bringing successful claims.

[21]Id. at *5 (finding “absurd” Nagy’s argument that the HEAR Act was inapplicable).

[22] Nagy argued that the HEAR Act is focused on a uniform statute of limitations and does not operate to bar equitable defenses or the doctrine of laches. See Defs.’ Br. at 23. Appealing to the Act’s legislative history, Nagy pointed out that the final version of the act omitted an express reference to laches that had been included in earlier versions. Id.

A newly enacted federal statute is intended to facilitate loans of art to U.S. museums from government-owned museums abroad, by protecting the art from private claimants while in the U.S. In recent years, fear that a U.S. court might order the seizure of artworks loaned to a U.S. museum for the benefit of claimants to the art, or creditors of a foreign government, has put a damper on cultural exchanges between the U.S. and various countries. The new law contains two important carve-outs, however, so its effectiveness remains to be seen.

On December 16, 2016, President Obama signed into law the Foreign Cultural Exchange Jurisdictional Immunity Clarification Act (the “FCEJICA”).1 The purpose of the new law is to protect from seizure by private plaintiffs claiming superior title or creditor status artwork loaned to U.S. museum exhibitions by foreign governments and museums that are foreign state institutions.

The new law amends the Foreign Sovereign Immunity Act (the “FSIA”) by clarifying that works in the collection of a foreign government or foreign state museum and imported for the purpose of exhibition or display are not to be considered part of “commercial activity” are and therefore immune from U.S. litigation under the doctrine of sovereign immunity. Under the new statute, immunity takes hold when an agreement is entered into by the work’s “custodian” (that is, the institution holding the art in its collection) and the U.S. government or a cultural or educational institution within the United States.

Once the loan agreement is executed and the President or his designee determines that the works in question are of “cultural significance” or that display of the works is “in the national interest,” those works obtain immunity from U.S. litigation.2

However, the legislation carves out an exception under which looted artwork whose chain of custody is traceable back to Nazi-era activity, by either the Nazi government itself or other European collaborationist governments formed by the occupying German army, does not fall within the statute’s protection and so may be reached by U.S. courts under the “commercial activity” exception to sovereign immunity.3 In addition, the legislation carves out an exception for property confiscated or misappropriated from vulnerable groups by oppressive governments after the year 1900.4

In general, foreign governments and their agencies are not subject to lawsuits in the United States under the doctrine of sovereign immunity, codified in the FSIA. That statute provides a number of exceptions, notably for activity of foreign state enterprises engaging in “commercial activity” in the U.S. The effect of the new law is to make clear that the FSIA’s “commercial activity” exception to jurisdictional immunity does not include works of art loaned by foreign governments or state-owned institutions and imported into the United States for an exhibition or display, with the above-noted exceptions for Nazi-era activity and oppressive governments aside. The aim is to give comfort to foreign governments and their state-owned museums that artworks they loan to U.S. museums will be returned to them at the end of the exhibition and will not be seized through litigation in state or federal courts—whether by claimants to the works themselves or creditors who allege they are owed money by the foreign government.

The issue of whether foreign state-owned museums are subject to the jurisdiction of U.S. courts under the “commercial activity” exception to sovereign immunity was famously litigated in Altmann v. Republic of Austria, 317 F.3d 954 (9th Cir. 2002), aff’d, 541 U.S. 677 (2004). In that case, the subject of the 2015 film Woman in Gold,5 the claimants sued the Austrian national museum (known in English as the Belvedere Gallery) in the Central District of California to regain possession of six Gustav Klimt paintings, including Adele Bloch-Bauer I & II. The plaintiffs claimed that the Belvedere’s publication, marketing and sale of guidebooks and books about Klimt in the gift shops of U.S. museums, and advertisements in the U.S., subjected the Austrian museum to the jurisdiction of U.S. courts within the “commercial activity” exception to sovereign immunity.6 The Ninth Circuit Court of Appeals held that the Gallery was in fact engaging in “commercial activity,” and the Supreme Court affirmed on the narrow question of whether the FSIA or prior case law controlled as to events occurring before the FSIA’s enactment.7

Since this development in interpretation of the FSIA, there have been instances of U.S. museums struggling to find foreign museums willing to make loans of art for their exhibitions. For instance, the Bronx Museum of the Arts in New York recently faced roadblocks in securing loans of art from Cuba for an exhibition titled “Wild Noise.” Despite the Obama administration’s commitment to an open relationship with Cuba and removal of the blockade against that island nation, the Cuban government refused to loan any artworks without guarantees from the United States government that no pieces would be seized.8 Cuba has good reason to be concerned over potential seizure of its property — at least 5,913 claims by American citizens have been registered with the U.S. Department of Justice concerning property taken by the Cuban government after Fidel Castro’s rise to power in 1959.9 Those claims are worth several billion dollars today.10 Because Cuba’s concerns over seizure have made it all but impossible for museums to put together exhibitions of Cuban art, recent exhibitions in the United States have been curated from American collectors.11

Groups such as the Association of Art Museum Directors have since 2012 supported the type of legislation embodied in the FCEJICA.12 Although the FSIA originally recognized the need for immunity for foreign states from many types of claims, the Altmann case diluted the protection available to foreign states under that statute.13

A prominent current controversy where the new statute may come into play involves the Russian government. In Agudas Chasidei Chabad of United States v. Russian Federation, a U.S. District Court judge fined Russia $43.7 million for failing to return to the Chabad Lubavitch movement (now headquartered in Brooklyn, NY) certain books, manuscripts and handwritten teachings of the Grand Rebbe of the Lubavitch movement seized by the Red Army during the Bolshevik Revolution, the Russian Civil War and World War II.14 Russia refused to participate in the American lawsuit, stating that it “decline[s] to participate further in this litigation” and “believe[s] this Court has no authority to enter Orders with respect to the property owned by the Russian Federation and in its possession, and the Russian Federation will not consider any such Orders to be binding on it.”15 The Russians argue that the Luvbavitch claims should be heard in a Russian court. In response to the court’s entry of default judgment in 2010, the Russian government has refused to loan works of art to American museums, citing a concern that a United States court will order the seizure of works to satisfy the judgment.16 Among the exhibitions from which Russian museums pulled back on loan commitments was the Cézanne show in 2011 at the Metropolitan Museum of Art and a 2011 show at the National Gallery of Art including Gauguin’s Tahitian period.17

Before its enactment, some critics argued that the bill, as originally introduced — although it contained the Nazi exception — would have placed the United States on the side of Russia and other oppressive governments that did not respect the cultural and other rights of minority groups.18 Thereafter, Congress introduced a new version of the bill that contained an additional carve-out which excepted property “taken in connection with the acts of a foreign government as part of a systematic campaign of coercive confiscation or misappropriation of works from members of a targeted and vulnerable group.”19 Congress then enacted that version of the bill.

Whether the new law will unfreeze potential art loans from Russia and other countries remains to be determined. It seems reasonable to conclude, given the legislative history and addition of the oppressive government carve-out in response to anti-Russian critics, that the new law will not affect the stalemate with Russia.20

A closer question is whether Cuba will change its no-loans stance in response to the new law. The statute’s “or” clause provides room for interpretation. Although it seems that Cuba would likely also fall under the statute’s reach because it arguably engaged in “a systematic campaign of coercive confiscation,” the Cuban government could argue that both the “coercive confiscation” and “misappropriation” described in the statute is relevant only in relation to “targeted and vulnerable group[s].” It may not be an attractive argument to make, but if any of Cuba’s art loaned to a U.S. museum were sought to be seized under the oppressive government carve-out, Cuba could assert that that provision did not apply because the Castro regime confiscated assets from anyone owning property—without discriminating against minorities.21 If that argument sticks, the Trump administration’s stance toward Cuba—and whether it would support Cuba in the event of litigation—will be decisive for the foreseeable future.

Museums hoping that the FCEJICA will revive stalled international art exchanges need to examine the larger picture. While enactment of this legislation may encourage some foreign governments and comfort them with a level of assurance they feel protects their property, other states will perceive a continuing threat of seizure based on their past actions. Rather than a cure-all for problems facing institutions seeking to borrow art from foreign museums, this legislation is only a starting point.

No one knows exactly how much art and cultural property the Nazis stole during what Agnes Peresztegi has called “the greatest art theft in history.” According to the Holocaust-Era Looted Art: A World-Wide Preliminary Overview, presented at the 2009 Holocaust Era Assets Conference in Prague, a “very considerable amount of looted movable artwork…and [cultural] property” held both privately and publicly remains to be recovered more than seventy years later. That same overview found that the United States had by that time only made substantial (not major) progress towards implementing the 1998 Washington Conference Principles on Nazi-Confiscated Art and subsequent resolutions. That remains true today. In short, more can be done.

The Holocaust Expropriated Art Recovery Act of 2016

On April 7, 2016, Senators Charles Schumer, John Cornyn, Ted Cruz and Richard Blumenthal introduced the Holocaust Expropriated Art Recovery Act of 2016, S. 2763 (the “HEAR Act”) to “help facilitate the return of artwork stolen by Nazis during the Holocaust to their rightful owners or heirs.” Read Sen. Schumer’s press release here. The HEAR Act would allow civil claims or causes of action to recover art or cultural property unlawfully lost during the Nazi era or damages caused by the taking or detaining of such art or cultural property to be commenced, nationwide, within six years of the claimant’s actual discovery of (1) the identity and location of the art or cultural property and (2) information or facts sufficient to indicate that the claimant has a claim for a possessory interest in that art or cultural property. This new six-year statute of limitations would preempt any other statutes of limitation or passage-of-time defenses and allow cases to be heard on their merits that might otherwise be barred by procedural hurdles.

The HEAR Act does not create a new cause of action and will not apply retroactively – it will apply to claims or actions pending on the date of its enactment or filed after enactment but before 2027. Such claims or actions may include those: (1) that were dismissed before enactment of the Act based on expiration of a federal or state statute of limitations, laches or any other passage-of-time defense; and (2) in which final judgment has not been entered. The Act defines “persecution during the Nazi Era” as “any persecution by the Nazis or their allies during the period from January 1, 1933, to December 31, 1945, that was based on race, ethnicity, or religion,” and “unlawfully lost” as “includ[ing] any theft, seizure, forced sale, sale under duress, or any other loss of an artwork or cultural property that would not have occurred absent persecution during the Nazi era.” The entire bill is available here.

Mr. Goodman, a plaintiff in the first Nazi looting case settled in the United States, continues to search for over 1,000 pieces of art and cultural property taken from his family during the Nazi era. Had Goodman v. Searle gone to trial, the applicable statute of limitations – New York’s demand-and-refusal rule or Illinois’ discovery rule that expires after five years – would have been an issue for the court. In his Senate testimony, Goodman also discussed the digitization of Nazi records, a step that will help him – and many other potential claimants – locate art and cultural property taken during the Nazi era. For example, in April 2016, Goodman was able to use Dutch online archives to locate a painting removed from his family’s home in 1940.

According to Ms. Peresztegi’s testimony, the six-year rule proposed in this bill was the product of a decade of discussions among museums, art professionals and claimant representatives. This consortium agreed that six years is long enough to facilitate negotiation and amicable resolution of restitution claims, and encourage museums to complete the provenance of their holdings and actively engage in restitution of Nazi-plundered art and cultural property. However, most United States museums are nonprofits without the research resources of, for instance, auction houses to thoroughly examine the provenance of those holdings – are their available resources up to this task? (For a summary of auction house resources, please see Ms. Dugot’s description of Christie’s provenance research abilities.)

The HEAR Act aims to increase the number of claims brought in the United States by eliminating the need to consider time-based procedural defenses on a state-by-state basis. Claimants and their counsel will only have to worry about one time-based defense: has it been six years since the claimant actually discovered the art or cultural property’s identity and location? The HEAR Act, coupled with newly available digital records, will also facilitate the return of art and cultural property to families that owned them prior to the Nazi era – and what those claimants do with the art or cultural property on its return will have an impact on the art industry. Museums may be able to borrow rarely-seen works and share them with the public, auction houses may see an influx in consignments, and collectors may have once-in-a-lifetime opportunities.

UPDATE: On December 7, 2016, the House of Representatives passed the HEAR Act and the Senate passed it two days later. (The HEAR Act was introduced in the House of Representatives as H.R. 6310 on September 22, 2016, and that version was passed by both houses and was not amended.) On December 16, 2016, President Obama signed the HEAR Act into law. Senator Charles Schumer said in his press release about the HEAR Act’s unanimous passage in Congress, “it is our moral duty to ensure that the survivors and their heirs are given the opportunity to bring their family heirlooms, including stolen art work, back home.” Securing passage of the HEAR Act was a bipartisan effort, with Senator Ted Cruz “proud to have worked closely with [his] colleagues on both sides of the aisle to empower the victims” and Senator John Cornyn noting that “artwork lost during the Holocaust is not just property – to many victims and their families it is a reminder of the vanished world of their families.” We now await the first HEAR Act claimants!

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Hughes Hubbard’s Art Law Group negotiates, litigates and advises clients on the full range of legal issues that arise concerning works of art, the art market and the art world.

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Hughes Hubbard & Reed LLP is an international law firm ranked for 12 years on The American Lawyer’s A-List of what the magazine calls “the top firms among the nation’s legal elite.” The firm was founded in 1888 by the renowned jurist and statesman Charles Evans Hughes.